He travelled back and forth to Australia during the interwar years, and served in a series of sea and shore positions before being assigned command of the Australian Squadron in September 1939. Upon his arrival in Sydney, Crace grew increasingly dismayed at the state of the RAN fleet and attempted to resign.[1] However, after war with Japan broke out, Crace was appointed commander of the Allied Naval Squadron, ANZAC Force.

During the Battle of the Coral Sea, Crace narrowly escaped a Japanese air raid while patrolling south of New Guinea. He returned to Britain in June 1942 as a vice admiral, commanding the Chatham Dockyard. Crace was placed on the retired list in 1945, but remained in command at Chatham until July 1946.